China Deflation Risks Grow, Foreign Central Banks On Alert

REUTERS/Kim Kyung-Hoon 10 Sep 2015

The risk China’s economy enters deflation is growing, data suggested on Wednesday, as signs emerge that some foreign central banks are increasingly worried about the impact falling Chinese prices and a weaker yuan could have on their economies.

New Zealand’s central bank governor Graeme Wheeler said that China’s surprise devaluation of the yuan, or renminbi, last month had left them concerned about the risk they may let it slide further.

“We’ve seen authorities basically say they want to stabilise the renminbi, but if there were to be a very substantial depreciation in the renminbi it would certainly export deflation around the rest of the world, so everybody is looking closely at China,” he said at a press briefing following an interest rate cut in New Zealand.

The deflation threat was underlined by data showing that Chinese manufacturers cut prices at their fastest rate in six years, with the producer price index (PPI) down 5.9 percent in August from a year earlier, though consumer prices are rising for now.

A growing worry for overseas central banks like the Reserve Bank of New Zealand (RBNZ) is that falling Chinese factory gate prices coupled with a weaker yuan mean the price of exports from China will fall sharply, feeding downward price pressures into their economies.

Wheeler’s comments came despite attempts by Chinese policymakers to reassure global markets that the yuan will remain stable and China’s economic growth, whilst slowing, is still set to be around 7 percent this year.

“The RBNZ…verbalised it but this is probably an underlying concern shared by policymakers around the region,” said Sim Moh Siong, foreign exchange strategist at Bank of Singapore.

Wheeler said his central bank’s view is that the Chinese economy is actually growing somewhere between “5-6.5 percent at this point”, a rare public comment by a central bank governor suggesting that China’s growth is below where the country’s policymakers say it is.

The risk China’s economy enters deflation is growing, data suggested on Wednesday, as signs emerge that some foreign central banks are increasingly worried about the impact falling Chinese prices and a weaker yuan could have on their economies.

New Zealand’s central bank governor Graeme Wheeler said that China’s surprise devaluation of the yuan, or renminbi, last month had left them concerned about the risk they may let it slide further.

“We’ve seen authorities basically say they want to stabilise the renminbi, but if there were to be a very substantial depreciation in the renminbi it would certainly export deflation around the rest of the world, so everybody is looking closely at China,” he said at a press briefing following an interest rate cut in New Zealand.

The deflation threat was underlined by data showing that Chinese manufacturers cut prices at their fastest rate in six years, with the producer price index (PPI) down 5.9 percent in August from a year earlier, though consumer prices are rising for now.

A growing worry for overseas central banks like the Reserve Bank of New Zealand (RBNZ) is that falling Chinese factory gate prices coupled with a weaker yuan mean the price of exports from China will fall sharply, feeding downward price pressures into their economies.

Wheeler’s comments came despite attempts by Chinese policymakers to reassure global markets that the yuan will remain stable and China’s economic growth, whilst slowing, is still set to be around 7 percent this year.

“The RBNZ…verbalised it but this is probably an underlying concern shared by policymakers around the region,” said Sim Moh Siong, foreign exchange strategist at Bank of Singapore.

Wheeler said his central bank’s view is that the Chinese economy is actually growing somewhere between “5-6.5 percent at this point”, a rare public comment by a central bank governor suggesting that China’s growth is below where the country’s policymakers say it is.